R&D Best Practices: Setting Strategic Directions

An excerpt from the Institute for Defense Analysis (IDA) paper “Commercial Industry Research & Development Management Best Practices,” with Michael J. Lippitz as contributing author.

[…] For leading companies, formulating and enforcing a clear, coherent strategic direction and plan for R&D is the foundation. What are the trends and forces shaping the industry, and how will the company position itself with respect to changing market conditions and competition? Does the company need to seek new businesses based on technical breakthroughs (radical innovation) or is it sufficient for R&D to support existing business units in upgrading, modifying or extending current products and services (incremental innovation)? Is R&D being pursued as a hedge against potential future scenarios in which the core business would be threatened?

Proctor & Gamble’s then-CEO A. G. Lafley expressed the pressures for redefining and restructuring R&D to meet new strategic realities: “Our challenge was three-fold. First was, we defined innovation way too narrowly. We defined it around the technologies, the chemistry, and we were sort of running a “push” innovation system. Secondly, we weren't executing very well. We were running industry-average success rates and, in our industry, 80 to 85 percent of new brands and new products fail, so we were only succeeding 15 to 20 percent of the time. Thirdly, we really weren't facing up to the realities of what had become a much more competitive, global, unpredictable, disruptive marketplace.”

R&D strategy also varies based on the fundamental demands of particular industries. In industries involved in complex system integration, such as aerospace, automotive, machinery, and information networks, keys to success are managing interfaces and supplier networks, and capital costs can limit the ability to test multiple variations. Companies that focus on inventing technologically advanced components require expertise at the boundary of science and manufacturing in markets that are often turbulent. Science-based industries such as chemical, pharmaceutical, and agriculture face regulatory hurdles that determine which products can come to market. Consumer products companies emphasize cost and efficiency, and flexibility is a competitive advantage in adjusting to quickly-changing market demands.

The role of R&D will be different in each of these cases, as will the people, resources, organizations, and tools necessary to accomplish the company’s mission. However, four themes are common among leading research-oriented companies:

R&D is managed for business results, even for exploratory projects.

Companies are increasingly accessing R&D from outside the company and integrating it with internal R&D, rather than depending primarily on internal discoveries.

Technology thrusts are explicitly derived from the company’s strategic perspective on how its R&D is aligned with business goals

Setting and maintaining technology development direction is a top-level corporate

Responsibility

Some examples from the interviews illustrate these themes: Applied Materials has adopted a partnership-driven strategy coordinated around explicit roadmaps, while it leverages its technical strengths to create major new product thrusts. Intel bases its R&D tempo on the well-defined product/process roadmaps in the integrated circuit industry. Exxon-Mobil maintains a technology implementation organization to bring new capabilities to the field for high risk exploration programs. IBM has moved away from a traditional lab science and technology (S&T) focus to one more integrated with corporate business development, though they have maintained a significant science program. P&G has transformed its central laboratory to focus more on external partnerships, going from Research and Development to “Connect+Develop.” In order to keep abreast of (and selectively access) leading edge scientific discoveries and emerging technologies that could disrupt the current business, many companies are building relationships with universities, research laboratories, and venture capitalists.

Once a corporate strategic vision of competitive aspirations and growth goals is set, companies need to translate these into specific R&D objectives that are tied to measurable value-creation milestones. R&D is increasingly integrated with corporate acquisition activities and venture funds to support broader corporate entrepreneurship efforts aimed at new business models in addition to product-focused work.4 IBM, for instance, has created a special process for “Emerging Business Opportunities” that leverages its technology base to develop businesses in adjacent markets. General Electric has implemented a process called “Session T” for identifying and prioritizing such opportunities through structured brainstorming on customer needs and the market, linked to technology options from Global Research that may be applicable to the needs. The Session T process helps GE determine what R&D is worth pursuing and how it is aligned with business needs. Much of Apple’s success has been attributed to its ability to redefine and shape markets with combinations of products and services that go beyond what current customers have experienced or even know about. To emphasize the business-building focus of its technology efforts, Apple does not refer to its engineering design work as R&D.

In leading companies, the organizational elements of R&D execution, such as resource allocation and designation of areas of technical interest, are determined through a top-level technology strategy process. An accountable executive, usually the Chief Technology Officer (CTO), works with business unit (BU) and R&D leaders in formulating the strategy. Boeing, for instance, redefined its advanced research organization.

Still, a fundamental problem in R&D management is that long-term investment in R&D is vulnerable to near-term demands. A key role of the CTO (and sometimes the CEO) is to explain, defend, and protect long-term and exploratory investments. The CTO may also provide general program oversight, particularly early-stage opportunity identification and prioritization. In companies where R&D is performed primarily within BUs, the CTO may review and approve R&D funding cuts. For example, GE’s photovoltaics business is yet not delivering significant earnings today but is viewed as an important long-term opportunity. Therefore, the program is overseen directly by the CTO until it matures, rather than being managed by the company’s Building and Construction BU. At the same time, the CTO may also have a role in shelving low-priority projects and redirecting resources.

An important related topic is R&D spending during general economic downturns. Most of the firms interviewed made it clear that the CEO and the CTO fight hard to maintain R&D funding as a strategic investment that should not be perturbed by business fluctuations, especially overall revenue. Intel’s former-CEO Craig Barrett, quotes Gordon Moore, “You can’t save your way out of a recession. You can only invest your way out of a recession.” He elaborates:

…it’s new products and new technology that create the demand for your products. Unless you have new technology and new products, there’s no new demand. So the only thing you can do in a recession is, in fact, to continue to invest and create exciting new products.

CTO Dr. Omkaram Nalamasu of Applied Materials stated that internal R&D at the company has remained around one billion dollars per year over the past several years, while revenues have fluctuated given the perturbations of the semiconductor market. He stated specifically, “Applied tends to spend more in R&D in downtimes.”

Clearly R&D expenditure cannot be totally divorced from revenue. First, most of the firms the IDA study team reviewed link corporate performance and R&D, and thus they see revenue growth as being a function of properly executed R&D. The reverse side is that declining revenues or the corporate competitive position have caused major changes in many companies’ approach to R&D.

For instance, IBM Research has evolved from a traditional independent Research Lab up to the 1970s to a greater focus on a clear link from R to D to manufacturing. The economic recession in 1982 forced IBM to focus on “tightening the ship” with a greater emphasis on connecting R&D to business results. In the 1990s, new CEO Gertsner determined that R&D was a substantial strategic asset for IBM, but also insisted that the company needed to get much more responsive results from its R&D. He therefore directed a fundamental redefinition of the Research Division as will be discussed below. Even with such changes in direction, IBM R&D has remained about 6 percent of revenue even through downturns. R&D in 2001 was $5.3 billion and in 2010 it was $6 billion, while revenue grew from $86 billion to $100 billion.